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Info to study from chapter 3 of the Federal Income Taxes I course
present value
the concept that $1 today is worth more than $1 in the future
future value formula
Present Value × (1 + r)ⁿ
timing strategy
accelerate deductions during high-tax-rate years and income during low-tax-rate years
constructive receipt doctrine
a taxpayer must recognize income when it’s actually or constructively received; restricts income deferral for cash-method taxpayers
income shifting
exploits the differences in tax rates across taxpayers or jurisdictions; common strategy is to shift deductions from low tax rate taxpayers to high tax rate taxpayers OR shift income from a high tax rate jurisdiction to a low tax rate jurisdiction
related-person transactions
financial activities among family members, owners and their businesses, or businesses owned by the same owners
assignment of income doctrine
requires income to be taxed to the taxpayer who actually earns it
conversion strategy
recasting income and expenses to receive the most favorable tax treatment (i.e., employer providing tax free benefits to exployees instead of salary); implicit taxes can reduce or eliminate the advantages of this strategy
business purpose doctrine
allows the IRS to challenge and disallow business expenses for transactions with no underlying business motivation
step-transaction doctrine
allows the IRS to collapse a series of related transactions into one transaction to determine the tax consequences of the transaction
substance-over-form doctrine
allows the IRS to reclassify a transaction according to its substance
economic substance doctrine
requires transactions to have both an economic effect (aside from the tax effect) and a substantial purpose (aside from reduction of tax liability)
tax avoidance
the legal act of arranging your transactions to minimize taxes paid
arm’s-length transactions
transactions among unrelated taxpayers, where each transacting party negotiates for their own benefit
effective tax planning
maximizes the taxpayer’s after-tax wealth while achieving the taxpayer’s nontax goals
